Illegal cigarettes: quick cash, light penalties

May 5, 2013

Updated Aug. 21, 2013 1:17 p.m.

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A Homeland Security Investigations special agent shows off one of the 1 million counterfeit Marlboro cigarettes that was to be destroyed. Agents said one of many tip-offs that they're dealing with a counterfeit smoke is the shabby construction. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

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Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

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The box on the left is a legitimate Marlboro product. The box on the right is a contraband knock-off. Differences, such as size of the logo, size of the product, fonts and subtle branding differences on the physical cigarettes are tip-offs. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

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Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

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A Homeland Security Investigations special agent cuts into boxes of counterfeit Marlboro cigarettes that had been seized. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

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Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

1 of 9

Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

1 of 9

Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

1 of 9

Homeland Security Investigations special agents give more than 7,800 cartons of seized counterfeit cigarettes to representatives from Phillip Morris in San Pedro. The cigarettes will be shredded. JOSHUA SUDOCK, ORANGE COUNTY REGISTER

A Homeland Security Investigations special agent shows off one of the 1 million counterfeit Marlboro cigarettes that was to be destroyed. Agents said one of many tip-offs that they're dealing with a counterfeit smoke is the shabby construction.JOSHUA SUDOCK, ORANGE COUNTY REGISTER

Law enforcement says illegal cigarettes pose a health risk to consumers, cost millions in lost tax revenue and serve as a conduit for criminals to launder money.

California has the seventh-highest rate of cigarette smuggling in the nation, according to the Tax Foundation.

David Sutton, a spokesman for Altria, the parent company of Phillip Morris that produces popular Marlboro cigarettes, said that his company is losing millions of dollars to the counterfeiters every year. Contraband cigarettes “are not uncommon in Orange County because of the population,” he said. “This tends to happen in dense, urban areas with established criminal enterprises.”

Tom Ferguson, a Homeland Security Investigations detective, said that the agency believes the illegal cigarette trade exists within certain local neighborhoods: “As far as cigarettes go, in Orange County there is definitely a market. Especially in your ethnic communities, whether it be Santa Ana or Westminster.”

Qui Sam Ho, of Westminster, was charged with two counts of contraband cigarette conspiracy in a federal indictment that was unsealed in March. The indictment alleges he was part of a national crime syndicate that conspired to illegally distribute nearly 44 million cigarettes from California to various places throughout the U.S., according to the United States Attorney’s Office.

Authorities say that illegal cigarettes come in many different forms. The two commonly seen in Southern California are counterfeit and counterfeit duty-free.

Counterfeits are cigarettes made overseas to look like well-known American brands and then smuggled into the country. Counterfeit duty-free cigarettes are also fakes, but disguised as legitimate, untaxed cigarettes intended for sale outside the country.

Produced in caves

Forged cigarettes are commonly produced in small caves and underground factories in Chinese rural provinces.

A pack of Marlboro cigarettes – the smoke of choice for counterfeiters and smugglers – can be produced for about 20 cents and then sold for up to 20 times that amount once they make their way to the U.S., according to the Organized Crime and Reporting Project website.

John Reynolds, a Homeland Security Investigations group supervisor, said that smugglers have begun shipping cigarettes in smaller, easier-to-hide quantities. Counterfeit cigarettes “are getting here in every possible way, just not in huge, massive containers like we used to see,” Reynolds said. “It’s too risky. So shipments are actually increasing, but in smaller quantities.”

Ferguson said that illegal duty-free cigarettes are the more commonly seen contraband cigarettes because law enforcement officials are sometimes fooled by the tax-exempt label.

Traffickers will only face misdemeanor charges if convicted of possessing less than about 12,500 cartons of duty-free cigarettes, rather than if they’re caught with counterfeit cigarettes, which is an automatic felony, Ferguson said.

Both types of illegal cigarettes are relatively cheap. Officials estimate that a carton of illegal cigarettes can fetch from $13-$25, while a legal carton of taxed cigarettes is around $60.

Officials said the cigarette trade operates like the narcotics trade – except it’s more lucrative. “When you think of cigarettes, I think the best way to do it is to think of drugs. It is exactly the same thing,” Ferguson said. “You have your street level and then all the way up to the major cartel distributors because it’s all about money. And actually, there’s more money in this than in drugs and less fines and penalties than drugs.”

The majority of people purchasing illegal cigarettes are aware that they are buying fake products, Ferguson said.

Ferguson said many traffickers -- including those in Westminster – run cigarette operations out of their homes, smaller family-owned stores and out of the trunks of their cars in areas where criminal activity is high.

Higher health risk

Ferguson said that the cigarettes made overseas run the risk of being exposed to infectious diseases from the people unsafely hand rolling them. Also, any pesticides used on tobacco grown for the illegal cigarettes isn’t regulated like it would be in the U.S. and might include harmful ingredients such as DDT.

He said that representatives from Altria busted an illegal operation in India where they found rat feces in counterfeit cigarettes.

The federal Food and Drug Administration strictly regulates the production, distribution and marketing of legal tobacco products in the United States.

“You know, it’s a very regulated industry and there’s reasons why you do what you do when you regulate certain industries. It’s for public safety,” Ferguson said. “At Phillip Morris here in the U.S., you could literally, and I kid you not, eat off the floors of the factory.”

The idea of safe cigarettes may seem impossible to the public due to smoking’s known deadly side effects, Reynolds said, but even harmful products need to be regulated for consumption.

“One of the main focuses of our group is public safety,” he said. “The thing is, if they’re going to choose to smoke, you might as well smoke something that has been regulated and quality controlled. With (fake cigarettes) there is none.”

Lost revenue

Law enforcement officials estimate that millions of dollars are lost in tax revenue annually because of the illicit cigarette trade.

“I don’t smoke, but the smokers who do smoke and choose to smoke pay the tax on their cigarettes, that goes to public safety jobs, health care jobs, everything which were seeing cut by people selling these that aren’t legitimate products,” Ferguson said.

A pack of cigarettes in California is taxed 87 cents by the state and $1.01 by the federal government. President Barack Obama proposed a 94-cent federal tax increase on cigarettes April 9, with the funds earmarked for education and to discourage smoking.

However, increased taxes on cigarettes will potentially increase the trade of illegal cigarettes, according to the U.S. Department of the Treasury.

“Higher prices on tobacco products have historically resulted in decreased consumption and increased illicit trade, which combined would indicate declining tax revenues in the out years,” Treasury’s website states.

State taxes on cigarettes fund several programs including a breast cancer research fund, cigarette-related disease research and environmental conservation – all of which lose revenue when smokers purchase contraband cigarettes.

The government is not the only one losing big money because of illegal cigarettes. The American cigarette companies, which estimate that millions of dollars are lost annually, work with law enforcement to protect their brands and profits.

Altria estimates that about 32 million packs of counterfeit cigarettes were seized by law enforcement in 2011, which if sold legally would be about $160 million.

Sutton said it is impossible to calculate the exact amount of lost profit because they are unaware of how many counterfeit cigarettes are currently being sold in the country: “Until you find [the illegal cigarettes], you don’t know they exist,” Sutton said.

Recognizing counterfeits

Sutton said that Altria works with law enforcement – including personnel in Orange County – by training officers on how to identify illegal products.

Ferguson said that his task force and other agencies attempt to bust traffickers with undercover operations and border protection.

“You’ve got to work your way and get trust with that person on the street, just like drugs,” he said. “Obviously, it’s a cash-based business. Not credit card, check. You know it’s a great way to launder money, it’s a great way to invest in other things for other ventures.”

Altria trained more than 1,200 law enforcement officials in 2011, according to its website.

Sutton said at the conclusion of an investigation, company officials authenticate the products to make sure they are counterfeit by examining the packs for distinguishing marks like date codes and clues in the physical packaging.

Homeland Security Investigation agents turned over more than 7,800 cartons of counterfeit cigarettes to an Altria affiliate on May 28 in San Pedro, who took the cigarettes and shredded them.

Sgt. Mike Chapman, a vice, narcotics and special unit investigation officer for the Westminster Police Department, said that his department has not worked on an illegal cigarette recently, saying that the issue is not a high priority. Chapman said when the department has uncovered contraband cigarettes, they were usually in small, family-owned liquor stores.

Ferguson said that Orange County does not have a designated task force to combat illegal cigarettes, but that his group works with local officials when cases become known.

Authorities believe the problem of contraband cigarettes will only grow in Southern California because of the weak penalties and high profit rates.

“There’s more money in this than there are in drugs and less of an exposure, risk and penalties,” Ferguson said.

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